Financing and Mode of Entry in Foreign Markets

35 Pages Posted: 22 Mar 2015

Date Written: March 21, 2015

Abstract

We study the mode of entry decision of a multinational firm with and without financing constraints on the local firm. We find that the multinational's expected profits are a discontinuous function of its belief about demand in one mode of entry. These discontinuities are due to the endogeneity of reservation utilities as well as the interaction between an agency problem and a game. Financing constraints lead to an increase in the multinational's profits from joint venture, while its profits from foreign direct investment decrease if the probability of high demand is low but increase otherwise. Examples show that joint venture arises for a larger set of beliefs when the local firm is financially constrained. This effect is strengthened as technology transfer increases, fixed cost of entry increases and as the multinational's cost advantage decreases.

Keywords: Multinational, Joint venture, Financing, Contracts

JEL Classification: D43, D86, L24, F12

Suggested Citation

Jain, Neelam, Financing and Mode of Entry in Foreign Markets (March 21, 2015). Available at SSRN: https://ssrn.com/abstract=2583051 or http://dx.doi.org/10.2139/ssrn.2583051

Neelam Jain (Contact Author)

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

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